FE Editorial : FDI caps vs Sebi rules

Though the government has cleared 49% equity limits for FDI by foreign airlines in the Indian aviation sector and may, BJP willing, do the same for both pensions and insurance, it will take some more fine-tuning before we see actual FDI coming into these sectors. Part of the problem, of course, is that with the economy looking as bad as it is, and the government not having done much after an initial burst some months ago to dispel the notion of policy paralysis, foreign investors are a bit sceptical. An equally large, if not larger, problem is that various government policies run counter to another, making it difficult for FDI to come in. Take the example of a foreign airline that buys a 49% stake in, say, Kingfisher. Under the Sebi open offer rules, once the acquirer buys more than 25% of a companys shares, it needs to make an open offer for another 26% shares. So, if Kingfisher investors want to get out the moment they see someone coming to buy the company and tender their shares for this, the foreign airline has breached the 49% rule since it will now have 74% of Kingfishers equity. The same logic applies for pensions and insurance, even if the FDI limit is fixed at 26%a 26% equity stake triggers an open offer and takes the FDI stake to 52% immediately. One solution then is to offload the extra stake laterso the airline that buys 49% stake from Vijay Mallya can buy 26% in the open offer and then sell this 26% back in the open market, perhaps with a special dispensation by the government giving it a few months to comply with the law. That is, break the law first, then adhere to it later.

This is unnecessarily cumbersome, but at one level it is part of the price the firm pays to come into the Indian market. But lets say the airline coming in to buy Kingfisher also needs to infuse R3,000 crore into the airline. How does it do that By getting Kingfisher to issue fresh equity. But since few shareholders may want to pay R1,530 crore (51% of R3,000 crore), the equity issue wont happen in such a way as to cap the FDI at 49%. Bringing in debt is another option, but this makes the airline unviable. So non-redeemable preference capital at a very low coupon rate may be another solution. Again, something that can be done, but it just complicates the picture. This is something the government needs to think about. Making delisting easier could be one solution since the open offer trigger no longer applies. Special waivers for FDI are another thought, though that creates unlevel playing field issues vis--vis local buyers. But since, at the end of the day, laws like open offers that are made to protect minority shareholders cannot be stifling business expansion, the issue needs urgent debate.